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Share this Story: 'Bankruptcy is not a license to ignore rules': Supreme Court rules companies must clean up old wells

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CALGARY — In a victory for landowners and the Alberta government, the Supreme Court of Canada has ruled trustees for bankrupt oil and gas companies cannot refuse to pay environmental clean up costs for uneconomic oil wells.

The Supreme Court sided in a 5-2 decision Thursday with the Alberta Energy Regulator and the provincial government, which had argued the trustee for bankrupt Redwater Energy should not be allowed to disclaim the responsibility for remediating inactive oil and gas wells.

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“Working families across this province as well as all of Canada should not have to pay for the financial and environmental liabilities left behind when companies walk away from their obligations,” she said.

The decision was highly anticipated across Alberta, where hundreds of thousands of inactive oil and gas wells dot the landscape, and at corporate offices in Calgary where oil and gas companies are under mounting pressure to remediate old wells.

The largest oil producers in the province applauded the ruling, but financial analysts and lawyers acting for insolvency firms say it will have a chilling effect on financing for smaller companies — especially those that have not actively remediated existing wells and have sky-high environmental liabilities.

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Keith Wilson, a lawyer representing landowners in Alberta with Redwater wells on their farms and ranches, said the decision was “good news” for taxpayers and the environment.

“The court was assessing whether or not it was the law of the land in Canada to have a principle of polluter pay or polluter walk away,” Wilson said.

At the heart of the case was the question of whether federal bankruptcy laws conflicted with, and therefore superseded, provincial environmental regulations, or what lawyers and judges call “the doctrine of paramountcy.”

“Bankruptcy is not a license to ignore rules, and insolvency professionals are bound by and must comply with valid provincial laws during bankruptcy,” Supreme Court Justice Richard Wagner wrote in the decision.

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The court ruled that Alberta’s reclamation rules “are based on valid provincial laws of general application – exactly the kind of valid provincial laws upon which the (Bankruptcy and Insolvency Act) is built.”

Grant Thornton, the trustee for Redwater, had argued — successfully in the lower courts — that federal bankruptcy laws should prioritize the rights of creditors and allow the firm to take responsibility only for Redwater’s valuable oil and gas wells and facilities, so it could sell those assets to repay the company’s debtors.

The court’s decision means that Albertans are better protected from the few irresponsible producers and operators in the system

Alberta Energy Minister Marg McCuaig-Boyd

Redwater’s uneconomic wells, pipelines and facilities would be handed over to the province’s Orphan Well Association, which is already struggling with a backlog of wells to remediate.

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There were 3,127 orphan wells in the province as of Jan. 28 and the problem “will take several years to address,” Orphan Well Association executive director Lars De Pauw said in a release, adding that he was encouraged by the court’s decision.

The Orphan Well Association should be “a last resort,” said Brad Herald, Canadian Association of Petroleum Producers vice-president Western Canada, in a release, adding the industry group was pleased with the decision.

“CAPP has argued on behalf of industry that when a company declares bankruptcy, the value of any assets should go to abandonment and reclamations costs first,” he said.

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In an added wrinkle, provincially owned bank ATB Financial had lent money to Redwater before it went bankrupt and was a respondent alongside Grant Thornton in the case — which pit the provincial government and regulator against one of the province’s largest Crown corporations.

The abandoned Redwater oil well site.Codie McLachlan/Postmedia News

The Supreme Court found that environmental reclamation was a public duty instead of a debt, said University of Alberta assistant law professor Anna Lund, whose work was cited in the decision.

She said the court had to determine whether environmental remediation should be considered outside of the priorities of the order of creditors in the bankruptcy case.

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“Here the Supreme Court of Canada says we have a regulator acting in a very different way, they’re acting to protect the environment, they’re not acting as a creditor,” Lund said.

The decision noted that the AER did not stand to benefit financially from the remediation work and the public duties of remediation “are owed, not to a creditor, but, rather, to fellow citizens.”

AER president and CEO Gordon Lambert said in a release he was encouraged by the decision.

“We are pleased that the Supreme Court recognized the potential massive impacts that this issue could have caused — not just for the energy sector — but for many industries across the country,” he said.

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Financial analysts said the ruling would likely make banks more hesitant to lend money to oil and gas companies with large environmental remediation liabilities.

“With reserve and bank line season underway, we suspect investors might then rotate out of names with high abandonment liability risk,” Raymond James analyst Jeremy McCrea said in a research note.

McCrea noted that Cadinal Energy Ltd., Bonavista Energy Corp. and Obsidian Energy Ltd. were among the companies “most at risk” given their high reclamation liabilities. Cardinal fell 1.3 per cent, Bonavista 3.2 per cent, and Obsidian closed flat on Thursday.

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The decision could also make firms like Grant Thornton and other insolvency practices less likely to act as the receiver or trustee in cases like Redwater Energy and other high profile cases such as Lexin Resources and Sequoia Resources, said Gowling WLG partner Tom Cumming, who acted for Grant Thornton.

He said that one of the uncertainties created by the decision is how insolvency firms get paid if reclamation obligations take on a “super priority” under the law before trustees and creditors.

“Trustees and receivers are paid out of the proceeds of the estate. They have a specific priority for the payment of fees,” Cumming said. “Bluntly, they do expect to be paid their fees.”

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He also noted that troubled companies need to apply for creditor or bankruptcy protection, and the ruling could make it less likely that companies will be able to take that step.

In cases like Redwater, Lexin or Sequoia — where the value of liabilities exceed the value of the assets — companies may simply be forced to close their doors if they can’t access debtor-in-possession financing, which would lead to wells being left derelict on the landscape without a receiver.

ATB Financial, which provided a loan for Redwater when it was struggling to stay afloat, said it’s too early to determine how the decision will affect its willingness to lend in similar situations.

“We respect the time and effort that has gone into this ruling,” ATB president and CEO Curtis Stange said. “We still believe it’s vital for the energy industry to have access to capital and access to liquidity.”

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